First Half of 2007 Sees Lower Prices, Fewer Imports
March 24, 2009 According to the National Cotton Market Monitoring System (NCMMS), seed cotton sales progress reached 95.53% as of April 25, down 1.16% from a year ago. Lint cotton sales met with resistance in late April, resulting in a downward price movement. Meanwhile, ginners became inactive in sourcing seed cotton, which brought about a negative impact upon seed cotton price. The average Grade 3 seed cotton price was 5.42 yuan per kg. in April. In May, average sales progress of gins was 76.7% (of the seed they have to sell), up 18.3% from year ago. Sales progress of Xinjiang cotton reached 88.8% (including reserves), up 27.3% from the previous year.
Yarn sales were stagnant during April and May. Furthermore, the allocation of cotton import quotas gave rise to more resistance against cotton sales in the domestic market. The average price of T328 was 13,017 yuan per ton in April, down 25 yuan, or 0.2%, from the previous month. The average price of the CNCE July contract was 13,510 yuan per ton, down 265 yuan, or 1.9% from month ago, and the average price of ZCE July contracts was 13,607 yuan per ton, down 362 yuan or 2.6%.
The cotton demand of Chinese textile mills did not increase at all after the allocation of the cotton import quota, which led to an aggressive decline of cotton prices in the world market. The average price of NYBOT July contracts was 52.34 cents/pound in April, down 2.24 cents, or 4.1%, from the prior month.
Outlook For The Remainder of 2007
A sampling survey of NCMMS indicates that the cotton stock of Chinese gins was 1.19 million tons at the beginning of May. Along with 300,000 tons of cotton in the warehouse of ZCE and CNCE, the industrial cotton stock totaled 1.49 million tons in China in April.
The average raw cotton inventory of textile mills (including imported cotton in the warehouses at ports) was available for 37.85 days of yarn production as of May 5, down 2.8 days from the previous month. Based on a total mill use of 9.97 million tons in the 2005/06 marketing year, the total raw cotton inventory was 1.03 million tons as of May 5.
Based on that data, the total cotton stock in China was estimated at 2.52 million tons as of the beginning of May. Meanwhile, China has allocated 2.394 million tons of cotton import quota from January to April 2007. Considering a cumulative cotton import volume of 723,200 tons during this period, the available cotton supply is estimated at 4.19 million tons (excluding the new crop supply in 2007) from May to December 2007.
Deposit Reserve Ratio, RMB Appreciation Accelerate
After the People’s Bank of China increased the loan interest rate by 0.27% in March, it also increased the deposit reserve ratio by 0.5% on April 16 and May 15, respectively. So far, the deposit reserve ratio has reached 11%.
On May 8, the exchange rate between the U.S. dollar and RMB was 1 vs. 7.6951, representing a record high since the beginning of foreign currency exchange reform in China. To date, RMB appreciation has reached 7.03%. According to the financial report of 58 listed textile and apparel makers, those companies suffered foreign currency exchange losses of 73,535,476.14 yuan in 2006, up over 900% from 2005.
Cotton Purchase Slow to Increase
Besides monetary deflation and RMB appreciation, Chinese textile mills also face the reduction of export value-added tax rebates. The existing 13% VAT rebate of textile and apparel exports will probably decrease by 2% and 4%, respectively. Perhaps that is why all Chinese mills increased their offering price during the 101st China Import & Export Commodities Fair.
Relevant study shows that the prosperous period of the textile industry usually ranges from five to eight years. The prosperity of the Chinese textile industry started in 2002. However, a downward glide was noted since 2005. The profit margin of the textile industry shrunk aggressively in 2006 due to the rapid growth of fixed asset investment. Actual fixed asset investment in the textile industry showed a 27.09% year-on-year growth in 2006, and the planned fixed asset investment in 2006 was up 25.06% from year ago. Starting from January 2007, the export value of cotton textile products showed a downtrend.
Besides the decline of export value, the yarn inventory has been heavy in China. Meanwhile, the weak price movement of cotton yarn is almost unchanged. Cotton demand from China is a problem, and the smooth cotton planting progress in China and the rest of the world is a bearish sign, though the technical rebound of New York futures is noted.
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